Stimulus+: Give People, Not Banks, Wads of Cash

Let them eat cash? Mark Blyth elaborates

Once more demonstrating how little understood us IPE scholars are, Yahoo! has an otherwise interesting feature on Scottish "economist" (shouldn't he go by "political economist"?) Mark Blyth talking about his ultimate stimulus plan. The gist of it goes like this: so the US has enacted unprecedented levels of monetary easing and stimulus spending to help the country recover. However, the financial system which intermediates in the process of cash reaching citizens' hands remains most unreliable. So, why not use stimulus more directly by giving it to them and not the unreliable, untrustworthy banks?

In the accompanying video, Mark Blyth, professor of International Political Economy at Brown University, talks about his idea. He says while quantitative easing -- or mass asset purchases -- have cost basically $2.8 trillion dollars so far, if you divide that by the taxpaying population it would come to about $56,000 per household. "Imagine if that had just been given to households," he asks.

"So why not just give them a fraction of that directly, rather than trying to force all of that money through the banking sector altering asset prices, causing asset bubbles and distortions, and hoping that some of it causes real growth," he adds.

What about the consequences, like inflation, as some critics argue would occur? Check out the video to see how he responds.

Unfortunately Yahoo! doesn't have an embed feature so you'll have to visit its site through the link above. (The full article is here.)

US Manufacturing ISM Expansion Continues for 15 Consecutive Months

US manufacturing continued its expansion for the 15th consecutive month. It has been in expansion since May of 2013 when it registered 50.0.

Manufacturing ISM Index



For details, lets turn to the August 2014 Manufacturing ISM® Report On Business®.

ISM at a Glance

Series Data	Aug Index	Jul Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	59.0	57.1	+1.9	Growing	Faster	15
New Orders	66.7	63.4	+3.3	Growing	Faster	15
Production	64.5	61.2	+3.3	Growing	Faster	6
Employment	58.1	58.2	-0.1	Growing	Slower	14
Supplier Deliveries	53.9	54.1	-0.2	Slowing	Slower	15
Inventories	52.0	48.5	+3.5	Growing	From Contracting	1
Customers' Inventories	49.0	43.5	+5.5	Too Low	Slower	33
Prices	58.0	59.5	-1.5	Increasing	Slower	13
Backlog of Orders	52.5	49.5	+3.0	Growing	From Contracting	1
Exports	55.0	53.0	+2.0	Growing	Faster	21
Imports	56.0	52.0	+4.0	Growing	Faster	19

This was a solid report.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine to Need Another $19 Billion from the IMF

Ukraine is already on the hook to the IMF to the tune of $16.7 billion. Today the IMF reassessed: Ukraine Crisis Hits Economy and Could Require Bigger loan.

In its first full review since agreeing a $16.7bn standby facility earlier this year, the IMF warned that the two main risks it had foreseen – intensification of the conflict in the east and a natural gas shut-off by Russia – had materialised.

If fighting continued in eastern Ukraine at the same level throughout 2015, it added, Ukraine would need additional financing of $19bn to shore up its central bank reserves.

“I am afraid that this should be the IMF’s base case. The original IMF programme was built on totally unrealistic assumptions,” said Tim Ash, economist at Standard Bank, in a note to clients. “The main question being asked by investors is when, not if, Ukraine will be forced to restructure/reprofile its debt ratios.”

Under its base case, it forecast Ukraine’s economy would contract 6.5 per cent this year – making it one of the worst performers in the world – rather than the 5 per cent previously assumed. Growth next year would be only 1 per cent, down from 2 per cent previously forecast, even if the fighting stopped soon.

If fighting continued through the rest of this year and 2015, however, the economy would contract by 7.3 per cent this year and another 4.2 per cent next year.

Many experts had warned when the IMF-led bailout was agreed that it was based on the most optimistic assumptions, with western political leaders anxious to support the new government in Kiev. But the fund conceded that Ukraine now faced “heightened geopolitical tensions and deepening economic crisis”.

“Intensification of the conflict in the east and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the programme request, have materialised,” it added. These had affected “confidence, balance of payment flows, economic activity and budget execution” and had led to larger-than-anticipated deposit outflows and bigger depreciation of the national currency, the hryvnia.

Inquiring minds may be wondering how Ukraine can possibly pay this back. The answer is they can't and won't. Alternatively Ukraine will be in an economic depression for decades if they try.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

France Needs a "Thatcher Moment" But First a Depression

It is amusing reading day in and day out the Keynesian cure for what ails Europe, especially France.

Consider France. Public spending amounts to 57% of French GDP, yet Keynesians want still more. The sad irony is that 100% would not be enough. In fact, it would make matters worse.

France suffers from too much government spending and too much government interference everywhere one looks.

The Problem

On Sunday, in Eurozone Currency Dispute Intensifies: France Wants More ECB Action to Correct Overvalued Euro, Germany Doesn't I summed up the problem.

Inflation Won't Cure France

Contrary to popular belief, inflation will not spur consumer spending. Nor will inflation create any jobs or cause wage inflation.

Nonetheless, France demands the ECB wizards fix something that cannot be fixed by monetary policy.

Problem number one is the eurozone itself. The euro is fatally flawed. In addition, France's problem is that it is not competitive with Germany and arguably even Spain, not that the Euro is too high.

France desperately needs structural reforms.

• It is nearly impossible to fire someone in France, so businesses are reluctant to hire. 
• Government and union rules on everything are sheer madness.  
• France seeks to save local bookstores by taxing online retailers and elimination of free shipping. 
• Agricultural subsidies to save inefficient French farms (at great expense to the rest of Europe) are inane. 
• Pension rules need fixes, and the retirement age needs to increase.
• The "French way of life" is incompatible with rising productivity, especially on a relative basis, so France is increasingly left behind.

How is QE supposed to fix all that? It can't and it won't, but it increasingly looks as if the ECB may give it a try.

The Solution

Yesterday, Steen Jakobsen, chief economist for Saxo bank, summed up the solution: France needs a crisis and a "Thatcher Moment".

Via email ...

French President François Hollande unveiled his new government under Prime Minister Manuel Valls on August 26, and there have been a few changes. While most senior ministers have retained their positions, economic minister Arnaud Montebourg was replaced by Emmanuel Macron, a former investment banker and economic adviser at the Elysée.

Hollande is already the most unpopular president in French history so he is not risking much by removing a political opponent like Montebourg (who should never have been part of a so-called reform program to begin with). Montebourg is a man of the old school and of old ideas: Among other things, he titled himself "Minister of Industrial Resurrection." His ideas included threatening to fine businesses for each job they failed to create and speaking against globalisation.

The problem for President Hollande and any reform efforts is that, as much as removing Montebourg was a victory for his economic strategy, it was also a loss in terms of his political ability to rule both his party and the French state. We often forget that economic policy without political backing is like skiing without snow: Policy needs political anchoring.

The supply-side economics and ideas of Prime Minister Valls are good, but they are not sufficient to stop the "rotting of France". More and more observers argue that what France needs is either an European Central Bank that goes into full Quantitative Easing mode, a France that pushes for fiscal expansion, or even both. Not only is that short-sighted, it´s also wrong: France needs a new political system, a new tax regime, a less bloated government sector, and fewer subsidies. France is not lost, it´s just disorientated and lacks purpose.

France is its own worst enemy. It believes in old virtues and ideas from a time gone by. Dirigisme, the French version of socialist capitalism, has failed. In its place there needs to appear a a robust commitment to its strong and well-educated workforce. France has the ability to innovate and its early stage small- and medium-enterprise support ranks among the best in the world. Unfortunately, its tax policy, its inability to attract capital and — more importantly — its dismal return on capital are significant impediments to new growth or any reforms.

France needs a Thatcher moment, with a new leader brave enough to get elected on a mandate for change. It needs a leader brave enough to tear down a political system that generates macro- rather than micro-scaled policies, an elitist society with too many incentives for bad behaviour and disincentives for private initiative, innovation and hard work. With or without Hollande, France just doesn’t seem ready to change yet. That is why we need a deep recession and even a depression before we see real change. Real changes can only emerge from a true crisis.

The good news is that France that has never been closer to this mandate for change than now, if only because we are quickly approaching the point where things can’t get any worse. French history is full of examples of crisis yielding quickly to dramatic change. The one that comes most quickly to mind is when King Louis XVI lost his monarchical powers during the French revolution. He inherited an enormous state debt (sound familiar?) and tried a number of policy moves, but in the end the crisis overwhelmed him, and he and his Ancién Regime subordinates lost not only their power, but their heads.

It’s time for a 21st century revolution in France. Dirigisme is dying. Vive la France.

Good News

The good news: A depression in France may be just around the corner.

Bad News

The bad news: The extremists waiting in the wings leave a lot to be desired.

Practical View

Socialists have so messed up the country in every way, that heads need to roll (just not literally as during the French revolution). Thus, any major shakeup could be a good thing, even if a free-market candidate is not the first one to surface in a new power shift.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Black Sea Oil Claims Before and After Russia Annexed Crimea

The significance of the annexation of Crimea by Russia goes far beyond land territorial claims. Here are a couple of maps that show how Crimea affects oil rights in the black sea.

Black Sea Claims Before Crimea Annexation



Black Sea Claims After Crimea Annexation



The above charts from the New York Times article In Taking Crimea, Putin Gains a Sea of Fuel Reserves.

Russia did not annex Crimea just because of Black Sea claims. But, those claims make it all the more unlikely that Russia would ever cede Crimea back to Ukraine under any circumstances.

Moreover, Russia has no land connection to Crimea, and Russia has every reason to want to end that situation.

If you are looking for another reason for the rebel counteroffensive "march to the sea", you now have one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

UK 'Hypocrisy': Not Punishing UK-Based Russian Oligarchs

"Only plebs complain about Vlad, dahling!"

Oh, the times they are a-changing: The gossip among Londoners in the posh parts of town is how usually flamboyant, noveau riche Russian oligarchs are lying low (for now). A few dozen less bottle blondes mixing with the Sloane Rangers and the chatter kicks into overdrive. The vulgar displays of oligarchs, their wives, mistresses, and assorted hangers-on in London has even spawned a trashy TV reality show. For those who experienced it--I did at the tail end while working there for two years--it was quite a parade.

Even if Russians are lying low in London, however, there are still signs of disquiet about how they continue to travel to and fro and conduct business quite freely. All this has raised the ire of anti-Russian voices especially after the events in Ukraine. With new European sanctions on the way, why all this British hypocrisy that allows the likes of Putin crony Roman Abramovich to splurge as much as he wants on Chelsea FC and more?

“Mr Cameron appealed to European governments to freeze accounts of oligarchs close to [President Vladimir] Putin. He can do it himself, with Roman Abramovich,” said Andrei Piontkovsky, a political analyst at the Russian Academy of Sciences, referring to the England-based owner of Chelsea FC. “Abramovich is one of Putin’s closest associates, he is one of those who put Putin in his post in 1999,” Mr Piontkovsky said.

His comments highlighted an apparent contradiction in the UK’s position. Government officials said Britain supported EU sanctions against those Russians who had indirectly helped support Russia’s interference in Ukraine – but Russians in the UK would not, for now, be affected. On Tuesday, Labour MPs called for the Conservatives to return a £160,000 donation from the wife of a former Russian finance minister who won a party fundraising auction to play tennis with the prime minister and Boris Johnson, the London mayor. Lubov Chernukhin, the banker and wife of Vladimir Chernukhin, made the winning bid at this month’s Conservative summer party held at the Hurlingham private members’ club in Fulham, west London.

The role of Russian money in the UK – particularly London – is extensive. Russia’s oligarchs, business people and senior officials have become one of the largest national groups of buyers for London properties worth £10m or more. There are now 113 companies from Russia and the broader CIS region with shares quoted on the London Stock Exchange.

I'll have more soon on the ongoing debates about how Russian buyers are shaking up the market for prime real estate in central London. Meanwhile, the Tories have some explaining to do with this "kick the Russians...except 'our' Russians" behavior. Dahling.

UPDATE: Also see this earlier Foreign Affairs article on this issue. 

Eurozone Manufacturing PMI at 13-Month Low, with Germany Worse than Expected, Italy and France in Contraction

The Markit Eurozone Manufacturing final data shows Eurozone Manufacturing PMI at 13-month low in August.

The rate of expansion in eurozone manufacturing production eased to its lowest during the current 14-month growth sequence in August, as companies faced slower increases in both total new orders and new export business. The final seasonally adjusted Markit Eurozone Manufacturing PMI® posted 50.7 in August, down from 51.8 in July, its lowest reading since July last year. The headline PMI was also below its earlier flash estimate of 50.8. National PMI data signalled a broad easing in the manufacturing recoveries underwa y across much of the currency union. Although Ireland was a noticeable exception, with its PMI at the highest level since the end of 1999, rates of expansion slowed in Spain, the Netherlands and Germany.

The rate of expansion in new work received also slowed to the weakest in the current 14-month period of growth. Economic and geopolitical uncertainties were the main factors underlying slower demand growth. Inflows of new export business posted the slowest rise since July 2013. France was the only nation to report an outright decline in new export orders in August, while rates of increase eased in Germany, Italy and Greece. Ireland, Spain and Austria reported stronger inflows of new export business.

The big-three nations of Germany, France and Italy all reported job losses, as did Greece. Staffing rose in Spain, the Netherlands, Austria and Ireland, but Ireland was the only nation to report a faster pace of hiring than in July. Signs that the manufacturing sector may be on course for further easing in the coming months was signalled by data on purchasing and stock holdings. Input buying volumes fell for the first time in over a year and inventories were reduced further as strong competition led companies to maintain a cost-cautious position. Meanwhile, the forward-looking ratio of new orders to finished goods inventories dipped to a 13-month low.

Countries Ranked by Manufacturing PMI® 

• Ireland 57.3 176-month high
• Spain 52.8 4-month low
• Netherlands 51.7 13-month low
• Germany 51.4 (flash 52.0 ) 11-month low
• Austria 50.9 Unchanged
• Greece 50.1 3-month high
• Italy 49.8 14-month low
• France 46.9 (flash 46.5 ) 15-month low 

Ireland, Spain, and the Netherlands cannot sustain a eurozone recovery. A recession in Germany is on the way, and will take the rest of Europe along for the ride. 

More sanctions on Russia will make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com